Business Tax Burdens-II

Our August 1985 Federal Tax Policy Memo on business tax burdens showed a comparison of effective rates of tax for the overall corporate sector over the post-war period. Effective rates of Federal income tax declined from the 1960’s onward reflecting the influence of tax relief provisions for business and timing factors. However, when state/local income taxes on corporations and the corporate share of payroll taxes are included in the calculation, the business tax burden rises, both absolutely and in proportion to total corporate profits.

The total corporate tax burden often is not taken into account in public policy considerations. Certainly it wasn’t in the formulation of the House tax reform bill last fall. The House Ways and Means Committee quite deliberately went about to impose both higher regular income taxes and as such tougher alternative minimum tax on the corporate sector. A large part of the rationale for the latter was, in the words of the Ways and Means Committee report, “to restrict the ability of corporations to eliminate their tax liability.” Reports of low or even negative effective rates of income tax on some corporations or industry sectors figured heavily in the process. The reported examples of corporate tax avoidance didn’t have much to do with the overall corporate tax burden but were used to demonstrate the “unfairness” of the present system.

The Ways and Means Committee report also emphasized a need “to restore the traditional balance of the income tax between individuals and corporations.” This is a legitimate concern. But it’s very difficult to judge just where that balance should be-quite aside from the fact that the real incidence of corporate taxes is always borne by individuals-as shareholders, employees, or customers—not impersonal—corporate structures.

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